We Should Not Renationalise the Railways

Privatisation is often blamed for the shortcomings of Britain's railways. This is unfair. Genuine privatisation never happened. Nominal ownership may have been transferred to the private sector, but the government remains firmly in control.

Renationalisation would only exacerbate this problem. Politicians and bureaucrats would still make the key decisions on rail - such as today's announcement that £9.4 billion is to be invested in various loss-making projects. But there would be even less attention given to commercial considerations and even fewer opportunities for entrepreneurship and innovation in the industry.

A far better option would be to move towards proper privatisation. Taxpayer subsidies could be phased out; loss-making lines could be closed; and investment could be restricted to those projects that were profitable. And perhaps most importantly, full privatisation would allow the merger of track and train, ending the disastrous fragmentation of the railways.

Fragmentation is not a market outcome - politicians and officials imposed an artificial structure on the industry. Historically, railways have nearly always been vertically integrated. But the government, influenced by EU policies on open access, has largely ignored this lesson. Different firms now manage the infrastructure, run the trains and own the rolling stock. There is also a complex system of regulatory oversight. This complexity has contributed to an explosion of costs. Following privatisation, subsidies from taxpayers have tripled to about £5 billion a year.

A complex structure is not the only problem facing the sector. The government also makes it extremely difficult for private companies to deliver efficiency gains. It actually became harder to close loss-making lines after privatisation, while service levels are largely determined politically, through the franchising system, rather than on commercial grounds.

The government also maintains price controls, including on key London commuter routes. Private firms are therefore severely limited in their ability to tackle congestion through more flexible fare levels. But they still get blamed for the resulting overcrowding. Worse still, the congestion creates pressure for investment in new capacity - placing a still greater burden on taxpayers.

While private involvement has brought some improvements, for example to marketing, the scope for entrepreneurship remains extremely limited. Indeed, when firms have tried to develop new privately-funded rail infrastructure, they have faced obstacle after obstacle from transport bureaucracies unwilling to cede control.

Rail investment is currently determined in a process not too dissimilar to Soviet central planning, and directed largely to meet political objectives rather than economic ones. As we see today, huge sums are spent on loss-making projects that make no commercial sense, with costs loaded on to taxpayers.

Perhaps the fundamental problem is the strength of the rail lobby, bolstered in some areas by the disproportionate political influence of wealthy rail commuters. Concentrated special interests have been able to extract huge amounts from taxpayers by capturing policy. Renationalisation is unlikely to break the cosy relationship between the rail lobby and policymakers; it will simply lead to more of the same.